China: Growth and Pollution

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1 China: Growth and Pollution Growth the Good Consistent growth rates of approximately 10% per year Vast improvement in per capita income Millions of people pulled out of poverty Increased choices and freedom Reduction in illiteracy Dramatic increase in post-secondary education

2 China: Growth and Pollution Growth the Bad Increasing income inequality GINI coefficient rapidly increasing (World Bank) 1981 (income) (income) (consumption) 47.4 U.S (income) 38.0 Note: The GINI coefficient is a measure of the inequality of the distribution of income in a country in which 0 would indicate total equality and 1 would indicate total inequality. Examples from the CIA World Factbook, Sweden (23) and Nambia (70.7). It is an index and hence does not have a unit assigned.

3 China: Growth and Pollution Growth the Bad Forced migration of millions 1.13 million displaced by Three Gorges Dam Dislocation and rapid urbanization 40% of mammal species endangered; 70% nonflowering plant and 86% flowering plant species threatened

4 China: Growth and Pollution Growth the Ugly Pollution (Picture from Google images)

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11 Environmental Issues in China Water shortage Per-capita water supply about a quarter of the global average China has the most ambitious cloud-seeding program in the world Water was free until 1985, still conservation and efficiency are alien concepts Of 660 cities in China, more than 400 lack sufficient water and more than 100 suffer severe shortages 7% of world's water resources and about 20% of its population Water imbalance with approximately 80% in south

12 Water Water Pollution 25% of rivers, lakes and streams too contaminated to use for drinking water 80% of rivers in Shanxi province rated unsuitable for human contact 2010 Ministry of Environmental Protection said 43.2% of state-monitored rivers were classified as grade 4 or worse, which means unsuitable for human contact; it was 42.7% in % of China s seven major rivers are severely polluted Nearly 500 million lack access to safe drinking water Polluted water used in irrigation costs 7 billion yuan annually

13 Air Air Pollution Despite massive efforts, particulates in Beijing violated WHO standards more than 80% of the time in the last quarter 2008 Acid rain a problem in nearly 200 of 440 cities monitored Acid rain costs 30 billion yuan in crop damage and 7 billion yuan in material damage annually (SEPA) Beijing residents buying on average 1,900 new cars a day in the first half of of the world s 20 most polluted cities in China (World Bank)

14 Cost of Pollution World Bank analyzed the cost of air and water pollution 362 billion yuan in 2003 Using adjusted human capital approach, this is about 2.68% of GDP Using the value of statistical life approach from studies in Shanghai and Chongqing, the amount goes up to 781 billion yuan or 5.78 % of GDP

15 Growth and Pollution Costs in Lives World Bank study with China s State Environmental Protection Agency (2007) Outdoor Air Pollution 350,000 to 400,000 premature deaths per year Indoor Air Pollution an addition 300,000 premature deaths Diarrhea, bladder infections and other diseases that can come from water-borne pollution 60, ,700 deaths from notoriously unsafe mines 89,000 people killed in road accidents per year, the highest number of automobile-related deaths in the world

16 Markets and Efficiency Requirements for efficient markets to operate: Buyers and sellers are well informed No asymmetric information Markets are perfectly competitive No monopoly power in the market Supply curve measures all relevant costs No negative externalities Not a Common Resource (Rivaled and Non-excludable)* Demand curve measures all relevant benefits No positive externalities Not a Public Good (Non-rivaled and Non-excludable)*

17 Markets and Efficiency * Note: Rivaled: the property of a good in which one person s use diminishes other people s use of that good If I am eating a slice of pizza, you cannot be eating the same slice If I am using the pen, you cannot be using the pen at the same time Excludable: the property of a good in which a person can be prevented from using the good If you do not pay for your pizza, you will not receive it If you do not pay for your cable TV, the company will turn it off

18 Externalities An indirect or unintended cost or benefit that producers and consumers don't take into account The cost or benefit affects a third party not involved in the trasaction An electric utility creates an external cost by burning coal that creates acid rain People downwind experience costs such as lower crop yields, higher health costs, etc. The utility doesn t consider this cost when it chooses the quantity of power to produce The customer doesn t consider this cost when it chooses the quantity of power to consume

19 Externalities An external cost is a negative externality A cost of an activity received by people other than those who pursue the activity Examples Pollution, Noise, Congestion, Second-Hand Smoke

20 Externalities An external benefit is a positive externality A benefit of an activity received by people other than those who pursue the activity Examples Education, yard beautification, immunizations A homeowner plants trees and flowers that the neighbors get to enjoy

21 Effect of a Negative Externality How do we measure the economic impact? How do we know that there is an inefficiency? Marginal Costs Marginal Private Cost = Cost to producer (MC or MPC) Marginal External Cost = Cost that is not borne by producer Pollution cleanup costs or health care costs Marginal Social Cost (MSC) is marginal private cost + marginal external cost The total costs borne by the entire society The producer + everyone e e else

22 Price MSC S = MC P soc Ext. Cost P e D = MB Q soc Q e Quantity Negative Externality Coal Generated Electricity

23 Effect of a Negative Externality If the market is left alone, the quantity produced will be too high from society s s point of view If the producer of a negative externality is required to internalize the externality, we would move to the socially optimal price and quantity Typical solutions involve Regulation Taxes on the product or the externality Selling pollution permits

24 China-Solutions: Negative Externalities China has used regulations but enforcement is poor February 2010 when the Pollution Census was reported, Chinese officials said they were studying the possibility of a pollution tax. October 2010, The Wall Street Journal reported PetroChina entered the carbon trading market It appears that the tools China is employing to control pollution are evolving

25 Effect of a Positive Externality Marginal Social Benefit Marginal Private Benefit = Direct benefit to the consumer Example: Education leads to better pay Studies show that each additional year of school increases a worker s wage rate by as much as 12-16% Marginal External Benefit = Benefit to society (or at least part of society) that is not directly received by the consumer Better communication skills Lower crime rates and higher tolerance levels Marginal Social Benefit (MSB) is marginal benefit + external benefit Example: Flu Shots

26 Price Ext. Benefit S = MC P soc P e Q e Q soc Positive Externality added health of flu shots MSB D = MB Quantity

27 Effect of a Positive Externality If the market is left alone, the quantity produced will be too low from society s s point of view To move from the market equilibrium to the socially optimal price and quantity requires some method to encourage an increase in production Typical solutions involve Regulation / Public provision Subsidy Voucher Patent and copyright

28 Solutions: Positive Externalities Public provision The production of a good or service by a public authority that receives the bulk of its revenue from the government Subsidy A payment that the government makes to private producers to cover part of the costs of production Voucher A token that the government provides to households that can be used to buy specified goods or services Patent or copyright A government-sanctioned exclusive right granted to the inventor of a good, service, or productive process to produce, use, and sell the invention for a given number of years

29 Education China-Solutions: Positive Externalities Nine years of mandatory education Dramatic expansion of post-secondary education opportunities Beautification Large numbers of trees have been planted in the cities, improving the appearance and the environment Health Care China s recent move toward privatization of health care, may be moving in the opposite direction and lowering the positive externality effects

30 Externalities Externalities result in a failure of the free market to allocate efficiently Results: overproduction of goods that produce negative externalities Results: underproduction of goods that produce positive externalities Without intervention, the Market Equilibrium will occur where MC or Marginal PRIVATE Cost (supply) equals MB or Marginal PRIVATE Benefit (demand) Efficiency, however, occurs where Marginal SOCIAL Cost, MSC, equals Marginal SOCIAL Benefit, MSB The government can add efficiency to the market by proper intervention